When you transfer money from one bank to another, are they just moving virtual bits around? Is anything backing those transfers? What prevents banks from just fudging the bits and “creating” money?

Question

When you transfer money from one bank to another, are they just moving virtual bits around? Is anything backing those transfers? What prevents banks from just fudging the bits and “creating” money?

In: 1559

Answer 1

Banks have to be audited externally by internationally recognized auditing firms like KPMG, so every month or so, each bank has to submit the audit reports to the central bank to check.

It’s impossible to create more money at the destination from the source, because banks use double-entry banking systems (such as Oracle FLEXCUBE and Temenos) that make absolutely sure that the credit and debit amounts are exactly equal. This kind of banking system runs data integrity check every night to make sure that everything are perfectly balanced.

Transferring money between banks usually goes through the central bank’s clearing house. This means the banks have deposit reserves held at the central bank. Basically, the central bank is a bank for banks. Each bank has banking accounts at the central bank, so money transfers are moving from one account to another.

Source: Banking IT expert here.